Chapter 9, Problem 7Q

Summary Introduction

To explain: The P/E multiple and EVA approach and their use to value a common stock.

Introduction:

P/E Multiple: The term used for price/earnings multiple reflects the market price of a stock as the times of earnings per share of that company. It determines the investors’ willingness towards the current market price of the stock.

Economic Value Added (EVA): It is a measure to evaluate a company’s stock based on the economic value it has added at a specified time. It considers the opportunity costs of capital invested in the business and the net operating profit generated by the business.